What is an Individual Savings Account (ISA)?

If you’re thinking of opening a savings account, you’re likely to come across ISAs.

These are a common type of savings account in the UK. But what is an ISA and how does it work?

In this handy guide, we’ll run through everything you need to know about ISAs. This includes types of ISA, how to open one, and the limits for deposits and withdrawals.

We’ll also show you an alternative to an ISA or a savings account. Wise is a money service provider with an account feature called Interest. With Wise Interest, you can earn a 4.70% variable rate* by investing in an interest earning fund using your GBP balance held in your Wise account.

Learn more about the Wise Interest

Capital at risk. Current rates do not guarantee future growth. *Variable rate is based on 7 day performance as of 10 Aug 2023. This fund has returned an 0.93% annual average over the last 5 years, excluding Wise and fund manager fees. See full 5 year past performance of funds. Not available in the US.

What is an Individual Savings Account (ISA)?

ISA stands for Individual Savings Account. It’s a type of savings account which lets you earn tax-free interest. With other types of savings accounts, you’ll pay tax on any interest you earn over your personal savings allowance.

There are a few different types of ISAs available in the UK. These are cash ISAs, stocks & shares ISAs, lifetime ISAs and innovative finance ISAs. We’ll look at each of these in more detail shortly.

Many providers offer ISAs, such as Santander, Halifax, Nationwide and Virgin Money to name just a few high street banks which list ISAs among their savings account ranges.

How does an ISA work?

There are a few differences between an ISA and a standard savings account. For starters, you can only save a maximum of £20,000 (your ISA allowance) in a cash ISA.¹

You can have multiple ISAs, although you can only open one of each type per tax year.¹ But the amount you can deposit will need to be spread between them, up to your maximum ISA allowance. So for example, you can have £10,000 in a stocks & shares ISA and £10,000 in a cash ISA.

Depending on the account type, whether it’s fixed or easy access, you may be able to withdraw your money and make multiple deposits. For some ISAs though, you can only deposit once and will only be able to access your money once the fixed term is over.

But like other types of savings accounts, ISAs pay interest on your money.

What is an e-ISA?

Similar to an e-savings account, an e-ISA is an account that is wholly managed online (or via a mobile app). It’s a popular choice with people who prefer to do their banking via internet or mobile banking.

The 4 types of Individual Savings Accounts (ISAs)

There are four main types of ISAs available in the UK. Let’s find out a little more about each in turn.

Cash ISAs

A cash ISA is the most similar to a standard savings account, but offering tax-free interest on your money. There are a few different kinds of cash ISA, including instant access, limited access and fixed rate. Some can be opened with as little as £1.

Stocks and shares ISAs

This kind of ISA is for investments, where you don’t pay tax on returns. It can be thought of as a kind of wrapper, which sits around a portfolio of investments.

These may include:²

• Individual stocks and shares
• Exchange-traded funds
• Government bonds
• Unit and investment trusts.

The ISA provider may offer fund options based on your preferred level of involvement and risk.

Innovative finance ISAs

Known as an IFISA, this kind of ISA helps you earn tax-free interest on peer-to-peer lending. This is where investors are matched up to borrowers.³

Lifetime ISAs

A lifetime ISA (LISA) is a longer-term savings product. It can be used for two distinct purposes - either buying your first home (replacing the now-defunct Help to Buy ISA), or saving for retirement.⁴

This kind of savings account works a little differently to a normal ISA. You’ll be able to deposit a maximum of £4,000 per tax year, which counts towards your £20,000 annual ISA limit. But you’ll also get a 25% bonus from the UK Government (maximum of £1,000 per tax year).⁴

Your LISA will earn tax-free interest too. However, you can only withdraw money when you buy your first home or turn 60 years old, depending on what you’re using the account for.⁴

What do you need to open an ISA?

To open an ISA in the UK, you’ll usually need to provide the following:

• Your contact details and address
• Your National Insurance (NI) number
• Your bank account details for deposits and withdrawals
• Details of any current ISAs if you want to transfer in.

Who can open an ISA?

Although it depends on the provider’s terms and conditions, you should be able to open a cash ISA as long as you’re a UK resident (for tax purposes) over the age of 16. For other types of ISA, you’ll need to be over 18 years old.¹

How much can you put in an ISA?

Each year, the UK Government sets an annual ISA limit - this is the maximum you can save in an ISA during the tax year. For 2023-2024, the limit is £20,000.¹

What are the limits for withdrawals with ISAs?

This can vary between ISA providers, so you’ll need to check with the bank or building society to see how much you can withdraw at once.

Wise – Money for here, there and everywhere

Open a Wise account online and you can manage your money in multiple currencies all in one place.

You can even make fast, secure international transfers for tiny fees and the mid-market exchange rate. There’s even a Wise card for spending abroad (or in the UK).

What’s more, as a UK resident, you can also earn a return by investing in an interest earning fund with the Wise Interest feature on your GBP balance. At the same time, you’ll have full access to your money whenever and wherever you need it. Just note, investments, even in a low-risk fund are never guaranteed.

Sign up with Wise

Capital at risk. Please see the Terms of Use for your region or visit Wise fees & pricing for the most up-to-date information on pricing and fees.

FAQ on Individual Savings Accounts (ISAs)

How many ISAs can I have?

You can have as many ISAs as you like, but you’ll only be able to open one of each type per tax year.

Is an ISA better than a savings account?

It all depends on your circumstances. If you think you’ll exceed your personal savings allowance during the tax year and want to avoid being taxed on the interest you earn, an ISA could be the better choice.

Is money safe in an ISA?

Yes, as long as the bank, building society or other provider is covered by the Financial Services Compensation Scheme (FSCS). This offers protection of up to £85,000 per person just in case the provider goes under.

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Sources used:

1. GOV.UK - Individual Savings Accounts
2. Money Helper - Stocks and Shares ISAs
3. Which - Innovative Finance ISAs explained
4. GOV.UK - Lifetime ISA

Sources last checked on date: 12-Sep-2023